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Obama, Senate — but not optimism — returning to Washington

Some expect a fiscal deal only after new Congress comes to town

Although President Barack Obama and the Senate are returning to Washington on Thursday from their holiday breaks, optimism about a fiscal cliff agreement is staying out of town.

Observers doubt that the Obama administration and Congress can cobble together even a limited deal to avert some of the nearly $600 billion in tax increases and spending cuts scheduled to go into effect on Jan. 1.

“It's clear that while taxpayers view Jan. 1 as the day of the fiscal cliff, Congress and the administration have a different view of when we go over the cliff — with the first or second week of January being an acceptable time period to get a resolution,” Dean Zerbe, national managing director of alliantgroup LP, a tax advisory firm for small businesses, wrote in an e-mail. “Many decision makers in Washington view the expiration of the tax benefits on Jan. 1, and the new Congress sworn in on Jan. 3, as events that will actually help get a decision.”

Not only will the political parameters change after the first of the year — as the lame-duck session of Congress concludes and the new Congress is seated — so will the context of the fiscal cliff negotiations. At that point, nearly every American will be paying more in taxes.

In the new atmosphere, it will be easier to claim victory for reducing taxes, according to Matt Mitchell, a senior research fellow at the Mercatus Center at George Mason University.

“Given the fact that taxes are automatically rising, I don't see an incentive for Congress to get anything done before then,” Mr. Mitchell said.

Investors won't be taken by surprise if the country falls off the cliff — at least for a while.

“That pessimism is already baked into the price of goods, services and equities,” Mr. Mitchell said.

Still, Mr. Obama is clinging to hope.

Before departing for his holiday vacation in Hawaii on Dec. 21, he called for Congress to pass a bill that would extend the Bush-era tax cuts for “middle-class Americans,” continue unemployment benefits and provide a framework for further deficit reduction.

“That's an achievable goal,” Mr. Obama said. “That can get done in 10 days. This is something within our capacity to solve. It doesn't take that much work.”

On Saturday, House Speaker John Boehner, R-Ohio, criticized Mr. Obama for failing to offer a plan during fiscal cliff negotiations that would substantially cut the deficit.

“Instead, he wants more spending and more tax hikes that will hurt our economy,” Mr. Boehner said in the GOP radio address. “And he refuses to challenge the members of his party to deal honestly with entitlement reform and the big issues facing our nation.”

Last week, Mr. Boehner pulled a bill off the House voting calendar that would have allowed tax increases for households making more than $1 million annually when enough conservatives resisted the measure to jeopardize its passage.

Mr. Boehner put the onus for resolving the fiscal cliff squarely on Mr. Obama and the Democratic-majority Senate.

“[W]e only run the House,” Mr. Boehner said. “Democrats run Washington.”

Marc Goldwein, senior policy director for the Committee for a Responsible Federal Budget, remains optimistic that a compromise can be reached.

“The vast majority of Republicans were going to vote to allow tax rates to go up,” Mr. Goldwein said. Evidence of Republicans' and Democrats' moving closer together is that each side is taking flak from its political base.

“They don't need to give up on principles,” Mr. Goldwein said. “They just need to give up on details in the spirit of compromise.”